Question

Software Inc. is considering the purchase of new computer equipment totaling $150,000 with an estimated salvage value of $25,000 after three years. Maintenance, repairs, supplies, and other operating costs are estimated to be $13,000 per year. Determine the following:

1. The annual cost based on the depreciation.
2. The annual cost using a desired ROI of 15%.
3. If the funds to purchase the equipment are borrowed at a rate of 8% for three years, what is the effect on the annual costs?
4. What is the annual cost if the equipment is purchased from internal funds, and it is sold for $40,000 after two years?

Answer 1

Solutions - 1

The annual cost based on the depreciation.

Purchase Value – $1, 50,000

Salvaged Value - $ 25,000

Useful Life – 3 Year

For calculating the annual cost, we can use following equation

Purchase value – salvaged value

                 Useful Life

So here – ($1,50,000 -$25,000)    = $41666.66

                        3

In addition to this we can add yearly $13000 as repair cost

So final Annual Cost = $54666.6

Solutions – 2

For solving the problem we should consider the above facts too.

Expected ROI is – 15%

Formula for ROI is – Profit / Investment * 100

So here $ 22,500 to be considered as return from investment ($150000*15%)

So annual cost based on expected ROI = $54666.6-$22500 = $32166.66

Solution -3

If we purchase the asset through loan @ 8% , interest on loan to be charge additionally to solution 1

It means - Loan Interest = ($150000 *8%) = $12000

So annual cost to be (54666.6+12000) =$66666.6

Solution -4

If it sold of 2^nd year as salvaeges value $40,000

Purchase Value – $1, 50,000

Salvaged Value - $ 40,000

Useful Life – 3 Year

For calculating the annual cost, we can use following equation

Purchase value – salvaged value

                 Useful Life

So here – ($1,50,000 -$40,000)    = $36,666.66

                        3

In addition to this we can add yearly $13000 as repair cost

So final Annual Cost = $49666.6